2023 in sports media has been anything but uneventful. In the past 12 months, we’ve seen layoffs at ESPN, a consequential carriage dispute, the death of a Power-5 conference, a regional sports reckoning, the continued decline of the cable bundle, and much more.
Sports media is changing before our eyes. Revenue from pay TV subscribers is waning. Digital giants once seen as saviors for the media rights market have shown only muted interest in live sports. Fragmentation continues to test fans’ patience as they bear higher costs to watch games. Young people simply aren’t watching sports as much as they used to. Yet, even with so much structural turmoil in legacy media, there remains reason to be optimistic about the future of sports media.
As many analysts and observers fret over the market forces effecting the industry, perhaps overlooked is the inherent safety of live sports as an entertainment product. Sports’ biggest asset — its built-in audience and dedicated fan base — should allow it to thrive long after revenue from the cable bundle dries up. The question is, who will be the beneficiaries?
The ESPN fallacy
Media observers have tended to conflate the health of ESPN with that of the health of sports media writ large. In the past decade, ESPN has lost over a quarter of its pay TV penetration, down to around 70m homes in 2023 from a peak of 100m homes in 2011.
Another set of layoffs cast a dark cloud over ESPN earlier this year as more than one thousand employees got the pink slip, including network staples like Jeff Van Gundy, Mark Jackson, and Suzy Kolber. Layoffs were hardly exclusive to ESPN; Warner Bros Discovery, The Athletic, and countless others also cut their workforce in 2023.
Understandably, industry observers jumped to doom and gloom narratives that the business of sports is in peril with a perpetually declining subscriber base and widespread layoffs in sports media. Despite this, data released by Disney earlier this year shows ESPN collected $10.79bn in revenue from affiliate fees (a direct function of pay TV households) and posted an operating profit of $2.9bn in 2022.
Losing 30 million paying customers over a decade is objectively not good. Generating $2.9bn in profit however, still qualifies as success. Despite losing a quarter of its customers, ESPN still turns a substantial profit and has plenty of the one asset that actually drives value in this industry: live sports rights.
Why are live sports rights so valuable?
Without getting too romantic, sports have a unique quality to satisfy certain needs of the human condition. Sports fulfill a primal desire for competition that can be traced back to the earliest periods of recorded history. As long as humans have existed, humans have competed.
Hand in hand is the innate desire for individuals to be part of a tribe. Fandom is at the heart of modern sports. It’s safe to say that most people crave the sense of community, connection to their city, or continuation of a family legacy that comes with fandom. These characteristics give sports a distinct advantage over alternative forms of entertainment like movies or scripted television which feel much lower stake.
Then, there’s the less philosophical and more practical value proposition for sports viewing. They are live and inimitable. They feed the present symbiotic relationship between networks, distributors, and the leagues; and even when the current pay TV model reaches its conclusion, live sports will remain valuable because there is no direct substitute.
In a world where we can access practically any piece of content ever made instantaneously, nothing other than sports demands appointment viewing. Sports viewing is habitual. NFL fans know where to go at 4:25 PM ET on Sunday. Brewers fans know when to turn on their television sets on summer evenings.
The scarcity of such content in today’s media landscape drives the increasing value of live sports rights. These rights are existential for companies like Disney, Warner Bros Discovery, or FOX with substantial exposure to the linear television business. Sports are the primary reason anybody has cable, and thus the main point of leverage for networks when they negotiate affiliate fees with distributors. If networks no longer have rights to sports that distributors deem essential for their customers, they risk losing distribution altogether.[1]
Sports are the linchpin keeping the entire pay TV model afloat. Which sports a network owns rights to practically determines its viability. Such importance means competition for live sports rights is fierce. Despite an environment of belt-tightening in the industry, the cost of live sports rights continues to increase. When the decision is pay more for live sports or cease to exist as a business, the calculus becomes pretty simple.
Live sports in a streaming world
The change that has defined sports media the past several years is the transition from pay TV to streaming. Legacy media companies that are still reliant on the bundle will continue to milk it for all it’s worth, though streaming will inevitably become a larger slice of the revenue pie in years to come. Live sports will remain a pivotal asset in a streaming-dominated media environment and comes with its distinct advantages for the digital age.
Live sports are attractive to streamers for a few primary reasons: wider distribution than linear, more valuable (and targetable) demographics, and mitigating churn. Streamers can meet the audience where they are — on phones, tablets, and smart TVs. Streaming services also skew younger, a demographic that translates to better ad rates and potential to create lifelong fans (and thereby lifelong customers). Then, unlike the cable bundle where customers are tied to annual contracts, streamers must consider measures to mitigate monthly churn. Holding rights to sports that span six or eight months of the year prevent people from turning off their subscriptions.
The present-day risk associated with streaming is fragmentation. Rights holders find themselves in a tough spot trying to thread a needle between nurturing the highly profitable but declining cable bundle and tackling a difficult transition to streaming. On one hand, rights holders need to prime their audiences for a world where streaming becomes the dominant distribution for live sports. On the other hand, placing inventory on streaming that was once exclusive to linear further devalues the bundle.
Fragmentation is a valid concern. Fans cannot be expected to pay for several streaming services on top of an already cost-prohibitive cable bundle. Leagues run the risk of fans becoming disinterested if it becomes too difficult to watch games. Fragmentation though, is temporary; it doesn’t pose a long-term threat. Eventually, a “re-bundling” will occur, and sports fans will have a more seamless experience. As long as leagues can keep fans on board in the interim — and they will, because there is no substitute for live sports — the outlook remains positive.
Who is poised to benefit from a new model?
Even with challenges facing the industry on the distribution side, the value in live sports is undeniable. Streaming — still in its infancy in many ways — has yet to prove it can be the engine that drives professional sports in the same way the pay TV bundle has. Professional sports have long been reliant on non-sports fans subsidizing the cost of live sports rights through their cable subscriptions. Some form of that model will come back as the industry consolidates, though the re-bundled alternative may not be as ubiquitous as the cable bundle.
While the industry sorts itself out and companies like Disney jockey to become the “hub” for all live sports content, networks and leagues necessarily scramble to find new sources of revenue to sustain growth. These range from second screen initiatives like sports betting to seeking investment from private equity or sovereign wealth funds.
Just in 2023, ESPN launched its own branded sportsbook, Saudi Arabia continued investments in global soccer, men’s professional golf, and Formula One, Qatar’s sovereign wealth fund bought equity stake in Monumental Sports (Washington Wizards owner and operator of a Washington D.C. based RSN), and private equity mulls investments in everything from legacy media companies to the PGA Tour. It was once unimaginable that Disney would involve itself in gambling or that oil rich countries in the Middle East would exert substantial influence over elite professional sports. Now, it’s par for the course.
Sovereign wealth funds may prove to set a new market in professional sports, pricing out stakeholders that once sought a profit for a new “pay-for-influence” model. Perhaps gambling companies like DraftKings and FanDuel seek more cozy relationships with the leagues. Maybe digital giants like Amazon, Apple, or Google finally decide to jump headfirst into live sports. Legacy media companies will seek to use the remaining leverage they have as rightsholders to carve out a space in the new world order.
It’s all uncertain, it’ll all be different, and it may even be uncomfortable, but for those looking to invest in entertainment, sports are a safe haven. Compared to other entertainment properties, sports offer reliable viewership, have relatively low production cost, and fill a lot of inventory. Other entertainment options like movies or scripted TV can be huge gambles with no guaranteed payoff.
The next few years may well determine winners and losers in the sports industry for the next generation of sports viewers. Predicting who ends up where seems futile, but the old adage of “follow the money” seems increasingly relevant. The leagues continue to generate more, legacy media less. All the while influential entities with deep pockets eye sports as a growing piece of the portfolio. The demise of sports entertainment has been exaggerated by some — interest in the product is still very robust, but the form factor, the way we as fans consume games, will certainly look different in just a matter of time.
[1] Each carriage negotiation is unique. Distributors that have diversified revenue streams are better positioned to negotiate favorable terms with networks than those overexposed to the cable bundle. Telecom companies like Charter and Verizon are in high-margin businesses like internet and phone, and therefore aren’t as dependent on the cable bundle for customer retention. Conversely, a satellite distributor like DirecTV is almost solely reliant on the pay TV bundle for viability, and won’t have the same leverage to negotiate better terms with networks.)
